In 2008, I was working as an economic development advisor in the Laval territory. It was the Great Recession and we were inundated with requests for help from struggling businesses. It was then that we welcomed a new colleague to our team. Her name was Guylaine and she had worked for financial institutions. Corporate finance, she really knew about it. It was she who taught me the power of a simple management tool: “the cash budget”.
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Indeed, a cash budget makes it possible to effectively manage a company’s liquid assets. In times of crisis, it is very often a lack of liquidity that sinks the boat. Obviously, it’s always a bit the same thing, the faster you master a management tool, the more likely it is to produce its effect before it’s too late. If it is necessary to retain investment projects, it must be done upstream.
Making a cash budget makes it possible to carry out simulations on the organization’s future liquidities. If we do it early enough, it becomes possible to try different scenarios of declining sales and thus assess the impact of these investment projects on liquidity. Is this the right time to invest in this equipment? Or can we do “overtime” while waiting to see things more clearly? Or outsource this extra work?
We are now on the doorstep of another downturn in the economy. Why ? Because raising central bank interest rates to keep inflation under control will certainly slow down the economy. It is in these circumstances that the priority becomes cash management for affected businesses.
Not all of them will be affected and they will not all be affected at the same time. But then, who will be hit first?
First, manufacturers of durable goods, in particular: automotive, aeronautics with a lag, household appliances, furniture, jewelry, books, etc. Indeed, it is of these goods that consumers will decide to delay the purchase.
Second, companies that have taken out loans with upcoming maturities; they will be hit by the rise in interest rates that will be generated by the central banks.
But then, what should these companies do? If they don’t have the skill or the time to do a cash budget, they need to develop that skill and find a resource person to do the work. The earliest would be best. Indeed, the possible scenarios decrease over time. If equipment or fixed assets need to be disposed of, now is the time. Not when no one else wants it.
What should business advisors and management consultants do? They have to prepare the ground. They have to find the vulnerable companies. Prepare a way to make them aware of the importance of controlling the liquidity of their operations: on a case-by-case basis or using physical or virtual presentations. Prepare methods for transferring knowledge to staff who will be required to perform cash budget scenarios. And finally, encourage businesses to strengthen their ties with their financial institutions so as not to cause surprises that would be perceived as major management shortcomings.